Chapter 14R, Problem 7MCQ

To determine

Total surplus of the society and the deadweight loss in the industry when a Pigouvian tax equal to the marginal external is imposed.

Answer to Problem 7MCQ

From the available options, the correct option increases or decreases.

Explanation of Solution

According to the graph, when a Pigouvian tax equal to the marginal external cost is imposed, then society’s total surplus will increase because the Pigouvian tax creates a negative externality which increases the market efficiency. And market efficiency improves the producer surplus as well as the consumer surplus which means there would be an increase in total surplus. In addition, the industry’s deadweight loss would decrease when a Pigouvian tax equal to the marginal external cost is imposed because the market is socially efficient by using the tax as it internalizes the external costs to others which avoids the deadweight loss. Therefore, all options: a, c, d, and options e are incorrect.

Here, the correct option is b (increase decrease).

Economics Concept Introduction

Introduction: Total surplus of society involves the surplus of the consumer as well as producers’ surplus and dead weight loss refers to a situation when demand and supply of goods reach out of equilibrium due to market inefficiency.